Why a Solid Credit Score Might Be a Young Person’s Best Investment
It’s easy for young investors to get ahead of themselves, diving in headfirst without learning the basics of trading stocks or by attempting to exploit inefficiencies in the futures markets, when only they themselves are being exploited. The truth, however, is that failing to walk before you run can actually be detrimental to both your portfolio and other aspects of your financial life. In particular, your credit standing is one often-overlooked financial consideration that it truly pays not to neglect.
Simply put, credit scores are not sexy. Perhaps that’s why 60% of people ages 18-34 don’t know their credit score, according to a recent survey conducted by Harris Interactive. Or maybe it’s a reflection of the disturbingly low levels of financial literacy in the United States. Either way, it’s important to come to grips with just how important your credit standing truly is as well as what you can do to maximize it.
Your credit score is basically a numerical encapsulation of your financial responsibility. It incorporates information about your borrowing, spending, and payment habits in order to quickly give decision makers across an array of different fields a sense of whether or not to trust you. Banks use credit scores to determine if you merit loans and lines of credit, and if so, what rates to give you.
Landlords take them into account when renting apartments, which can be especially important for recent college graduates who may have the perception of immaturity working against them. Car dealerships use them when considering the eligibility of a potential lessee. Perhaps most importantly, nearly half of all businesses conduct credit checks on potential employees, and if you are interested in working in the investing field, that percentage is likely much higher.
It should therefore be clear that a good credit score could save you tens of thousands of dollars over the course of your lifetime. While that’s indeed true for anyone, there are also a number of unique ways in which investors can benefit from the best possible credit score:
- More to invest: Not only does a sensible investor possess the unique ability to turn tens of thousands of dollars into millions over a lifetime, but having deeper pockets will also make it easier to ride out losses. Plus, if you are someone who invests with leverage (something that is not recommend), a higher credit score will enable you to borrow more money at a lower cost.
- Venture into real estate: With mortgage interest rates hovering near record lows, young professionals with money can buy property and potentially reap sizable long-term gains. Getting the best possible deal on a mortgage, of course, requires a great credit score.
- Responsibility begets responsibility: Understanding the state of your credit and striving to perfect it will hopefully get you in the habit of responsibly managing money. This could have a very positive cross-over effect on your investment strategies, leading you to lower risks and more effective allocation of funds.
If you understand the value of a great credit score, let’s talk about how to get one. The name of the game is maximizing the amount of positive information in your major credit files (i.e. those managed by Experian, Equifax, and TransUnion). The most efficient way to do so is to open a credit card account and either pay for any purchases you make on time each month or lock your card away unused.
Credit card companies relay usage information to the major credit bureaus on a monthly basis, and as long as this information does not reflect late payments or maxed out credit lines you should see tangible credit score gains within a year. Ideally, you should begin your credit career while still in college in order to have an established credit record when you graduate and need to find a job, a place to live, etc. Starting early will also enable you to take advantage of a student credit card offer, which will likely be better than what other inexperienced consumers can get approved for, given the desire of banks to garner lifelong customers with high earning potential.
If you aren’t a student or are simply having trouble getting approved for a credit card, open a secured card. You’ll have to place a security deposit in doing so, but that’s actually a good thing because it will serve as your credit line, thereby protecting you from overspending, allaying issuer fears of not getting paid back, and enabling you to increase your available credit (and, in turn, your credit building gains) at will. Ultimately, one of the best investment we can make is in ourselves, so it makes sense to maximize your credit standing.
This guest post comes from our friends at Card Hub, a leading website that helps consumers find the best credit cards for their needs and improve their overall personal finance performance.Tags: credit